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Blue chip valuations at the nadir of the 1930s market crash


Graham Osborn

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Although the market valuations in 1929 were quite high, it's easy to forget that a lot of blue chips were trading at half book or less after the crash.  Admittedly, some of these companies probably had a lot of goodwill in their book values from acquisitions during the boom times, but still:

 

https://www.joshuakennon.com/a-look-at-some-major-stocks-during-the-bottom-of-the-1933-stock-market-crash/

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I wonder about whether the energy stocks are buggy-whip companies.  It feels like we're on the edge of a pretty fast transformation to environmentally-friendly energy sources (e.g. the economics of solar and wind, the move to electric vehicles, the move to autonomous vehicles).

 

I wonder what will happen if, for instance, demand falls by 5M barrels over the course of a couple of years and then keeps declining.  With a commodity like oil, I feel a 5% drop in demand could nuke prices.  Thus, it seems to me that energy doesn't have much margin of safety when the demand is uncertain.

 

I'm curious what perspectives other people have on this.

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First step is to stop drinking the Liberal cool-aid Richard. I know it will be hard for you, nearly impossible.

 

Second is to look at hard numbers on supply, demand, EV impact, renewables growth, etc. We have an extensive and active thread on this website, unless you missed it, where many people have chimed in and provided ton of data from various sources.

 

Third, make your own call.

 

However, statements like these do not pass the smell test: "It feels like we're on the edge..."

 

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I love the idea of renewables, but sun doesn't shine at night and wind isn't constant either.  Until we get Silicon Valley to solve those problems we're going to need something else to fill the gap.

 

In terms of blue chips being cut down...

 

This wasn't just in the 1930s crash.  Look at any major crash and it happens everywhere.  What's unique about the US is we haven't experienced this again.  We had the 2008 crash, but everything bounced so quickly.

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Second is to look at hard numbers on supply, demand, EV impact, renewables growth, etc. We have an extensive and active thread on this website, unless you missed it, where many people have chimed in and provided ton of data from various sources.

 

Yeah, that's what I've done, and what's inspired my comment.  The interesting thing is that, if I listen to liberals as you think I am, my conclusion would be that nothing is being done to target CO2.  It's mainly the non-liberal point of views that are leading me in the direction of: "change is coming". 

 

Of course, I suppose that your way of communicating is to constantly use ad hominem attacks before substance, so I'm not really surprised that you responded to my honest question in this way.  It's a pity though, because I feel like you could actually contribute a lot of value if you weren't so angry.

 

 

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I love the idea of renewables, but sun doesn't shine at night and wind isn't constant either.  Until we get Silicon Valley to solve those problems we're going to need something else to fill the gap.

 

I agree with that--barring a significant breakthrough like cold-fusion, I don't think we get rid of all combustion-based generation.  But if we are able to get rid of half, I would still think that would have a huge impact on the use of oil and gas.  I really like the theoretical idea of using electric vehicle batteries to address variance in demands for electricity, even if there are huge practical issues with that strategy.

 

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I wonder about whether the energy stocks are buggy-whip companies.  It feels like we're on the edge of a pretty fast transformation to environmentally-friendly energy sources (e.g. the economics of solar and wind, the move to electric vehicles, the move to autonomous vehicles).

 

I wonder what will happen if, for instance, demand falls by 5M barrels over the course of a couple of years and then keeps declining.  With a commodity like oil, I feel a 5% drop in demand could nuke prices.  Thus, it seems to me that energy doesn't have much margin of safety when the demand is uncertain.

 

I'm curious what perspectives other people have on this.

 

I am unsure which part of the country you are in...but in the MidWest electric cars are more common than Ferraris but LESS common than Porsches.  Electric cars are well LESS than 1% of the market where I am at.  Even if the number of electric vehicles sold increased by a factor of TEN, they would still be a tiny minority of the cars on the road.

 

I would also venture a guess that the 3rd world will still be working with ICE vehicles longer than the west does, as it will be cheaper.

 

Then you've got the whole truck situation.

 

As to vehicle sharing...I don't really see that spreading farther than NYC and places where subways are viable.

 

There are ton of people that need vehicles at specific/random times and they need the vehicle NOW, and thus need to own one.  There is another large set of people that store stuff in their vehicles (think work tools) and thus need to own a vehicle.

 

A lot of the trendsetters in NYC/LA think that the rest of the country operates/thinks exactly the way that they do...this can lead to dangerous/false assumptions.  The best example of this is the election of President Trump!

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"I wonder what will happen if, for instance, demand falls by 5M barrels over the course of a couple of years and then keeps declining.  With a commodity like oil, I feel a 5% drop in demand could nuke prices."

 

If you were not putting out there comments such as these which indicate zero research on your part, then you would probably get a kinder response from me. Yup a lot of substance... 5 million barrels/day in a couple of years... Wow!

 

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If you were not putting out there comments such as these which indicate zero research on your part, then you would probably get a kinder response from me. Yup a lot of substance... 5 million barrels/day in a couple of years... Wow!

 

Come on, you and I both know that nothing I write will ever get a kinder response from you.

 

In 2008, oil demand in the USA alone fell by 1.1M barrels in a single year without the tailwinds of rising environmentalism and the compelling economics of renewables. 5M is unlikely but plausible, particularly considering that pretty well everywhere but USA cares about climate change.  (Plus, I think you don't really understand the concept of tipping points, but whatever.)

 

That said, I understand your reaction.  If a hypothetical scenario would completely annihilate your portfolio, it's more comfortable closing your eyes and attacking the hypothetical than seriously thinking about the question.

 

(The irony is, I think I'm probably doing you a disservice on this thread.  By raising these questions, I'm making you entrench yourself into position which will make you slower to change your opinion when scary stuff starts to happen.  Sorry for that.)

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I agree with you, DTEJD1997, that we aren't at the tipping point yet when it come to electric and autonomous vehicles, but I'm also not sure that I'll be able to identify that tipping point accurately when it arrives.  That make me reluctant to invest in energy--it feels akin to pennies in front of steamrollers.  Plus, I'm concerned that, if I actually had a major position in energy, it would impact my thinking about the transformation, always thinking that I had one more year in these cheap stocks before everything falls apart.

 

One factor that seems to be overlooked is autonomous vehicles, and I feel like that transformation will be mostly complete in 10 or 15 years. With my car, there's about a 15% difference in energy usage between my wife's driving and mine. I'd guess that this sort of spread isn't unusual and that most people aren't driving in energy-efficient ways, while autonomous vehicles will.  If you assume that autonomous vehicles gain an average of 10% fuel efficiency over human drivers, then--with about half of oil used to power vehicles--you've got a 5% drop in oil usage there alone.

 

(And really, autonomous vehicles can make energy-saving decisions that human drivers can never make (e.g. coast well below the speed limit for a few blocks because there's no value in arriving at the traffic light before it's green). I wouldn't surprise me if, over the long term, autonomous vehicles are far, far more efficient than human drivers.)

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Instead of coming up with a bunch "if's" why don't you read the reports on future demand from various organizations that have actually crunched the data and took into account the impact of renewables, population growth, increased efficiency ,etc.?

 

Then once you have done that and found a big hole in their analysis, then come lecture us.

 

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I agree with you, DTEJD1997, that we aren't at the tipping point yet when it come to electric and autonomous vehicles, but I'm also not sure that I'll be able to identify that tipping point accurately when it arrives.  That make me reluctant to invest in energy--it feels akin to pennies in front of steamrollers.  Plus, I'm concerned that, if I actually had a major position in energy, it would impact my thinking about the transformation, always thinking that I had one more year in these cheap stocks before everything falls apart.

 

One factor that seems to be overlooked is autonomous vehicles, and I feel like that transformation will be mostly complete in 10 or 15 years. With my car, there's about a 15% difference in energy usage between my wife's driving and mine. I'd guess that this sort of spread isn't unusual and that most people aren't driving in energy-efficient ways, while autonomous vehicles will.  If you assume that autonomous vehicles gain an average of 10% fuel efficiency over human drivers, then--with about half of oil used to power vehicles--you've got a 5% drop in oil usage there alone.

 

(And really, autonomous vehicles can make energy-saving decisions that human drivers can never make (e.g. coast well below the speed limit for a few blocks because there's no value in arriving at the traffic light before it's green). I wouldn't surprise me if, over the long term, autonomous vehicles are far, far more efficient than human drivers.)

 

Well, you may very well be right! 

 

However, I know a few people in the auto/transportation industry.  Some of them are engineers.  I've asked them about autonomous vehicles and they think they will first come into "restricted" areas.  For example, large trucks driving on access controlled turnpikes.  Think freight heading West to East (or vice versa).

 

The guys I know say they've made some tremendous/incredible progress...they are getting maybe 90% of the way there...HOWEVER, the real problem is the unexpected/odd condition on the roads.  Humans can adapt to this VERY easily, but the driving systems have terrible problems with this.  Nobody is going to ride in a car that is 90% safe...Nobody is going to ride in a car that is 99% safe....What about 99.9%  Or 99.95% safe?  Hard to make that judgement.  Getting that final few percentages of safety may prove to be a very difficult thing indeed!  It may take 10X more engineering skill & $$$ to go from 98% safe to 99% safe.

 

As to electric vehicles, they say more of them are coming, no doubt to that....but that very wide spread adoption may take years & years & years.  There might NEVER be wide spread adoption unless there is tremendous change made to the electrical grid.  There is also a question as to whether or not there is enough lithium & such to even produce enough batteries...

 

So we will see, but I don't see a large change coming in the next 3-5 years.

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For small to mid-caps Canadian energy stocks, it is pretty much like 1933 right now.

 

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I certainly wouldn't disagree with that.  I played with Canadian E&Ps (specifically TGA and BNKJF) a few years ago.  I gradually came to realize that in a secular bear market in crude the fundamentals themselves would be seriously impaired.  Cyclicals will do that, and some never come out.

 

The crazy thing in the early 1930s was you had companies like Coke trading at similar valuations.  I did a little simulation of what some popular blue chips today would look like at those same valuations:

 

Symbol Name Price to Book Value PE Ratio (TTM)

FMCC Federal Home Loan 0.0 18.2

MSFT Microsoft 1.7 12.0

GOOGL Alphabet 1.0 11.7

TCEHY Tencent Holdings 2.8 11.1

BABA Alibaba Group Holding 1.7 9.2

FB Facebook 1.4 6.5

WMT Walmart 0.8 5.3

BRK.B Berkshire Hathaway 0.3 5.2

XOM Exxon Mobil 0.4 4.9

CVX Chevron 0.3 4.7

INTC Intel 0.6 4.4

PG Procter & Gamble 0.8 4.3

UNH UnitedHealth Group 0.9 4.1

ORCL Oracle 0.7 4.1

CSCO Cisco Systems 0.6 4.1

RDS.A Royal Dutch Shell 0.3 4.0

BAC Bank of America 0.3 3.9

TSM Taiwan Semiconductor 0.9 3.9

JPM JPMorgan Chase 0.3 3.5

AAPL Apple 1.1 3.2

DIS Walt Disney 0.7 2.9

WFC Wells Fargo 0.3 2.8

RY.TO Royal Bank of Canada 0.4 2.6

TD.TO The Toronto-Dominion Bank 0.4 2.6

MO Altria Group 1.6 2.4

SNY Sanofi 0.3 2.1

CIHKY China Merchants Bank Co 0.3 2.1

CHTR Charter Communications 0.4 2.1

PFE Pfizer 0.7 1.9

TM Toyota Motor 0.2 1.9

UNP Union Pacific 0.8 1.9

SBRCY Sberbank of Russia 0.3 1.8

DDAIF Daimler 0.3 1.8

CMCSA Comcast 0.5 1.6

T AT&T 0.4 1.5

IDCBY Industrial And Comml Bank 0.2 1.5

CICHY China Construction Bank 0.2 1.4

VZ Verizon Communications 0.9 1.4

HMC Honda Motor Co 0.2 1.3

BACHY Bank Of China 0.1 1.3

BCMXY Bank of Communications 0.1 1.3

ACGBY Agricultural Bank China 0.2 1.3

OGZPY Gazprom 0.1 0.7

NGG National Grid 0.3 0.7

SVCBY Svenska Cellulosa 0.3 0.1

SWZNF SNB 0.0 0.0

CHL China Mobile 0.3 0.0

FNMA Fannie Mae 0.0 0.0

PNGAY Ping An Insurance (Group) 0.0 0.0

NSRGY Nestle 0.8 0.0

 

Imagine Facebook trading at less than 10X earnings.  It's almost mind-bending.  But then again, people were sitting on 70-90% portfolio losses, losing their jobs, losing their savings accounts, etc.  Hard to mentally reconstruct the despondency of the country in that era..

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I wonder about whether the energy stocks are buggy-whip companies.  It feels like we're on the edge of a pretty fast transformation to environmentally-friendly energy sources (e.g. the economics of solar and wind, the move to electric vehicles, the move to autonomous vehicles).

 

I wonder what will happen if, for instance, demand falls by 5M barrels over the course of a couple of years and then keeps declining.  With a commodity like oil, I feel a 5% drop in demand could nuke prices.  Thus, it seems to me that energy doesn't have much margin of safety when the demand is uncertain.

 

I'm curious what perspectives other people have on this.

 

I think many folks forget that oil and gas is used in plastics, fertilizers, jet fuel (doubt this will be changing anytime soon), and, outside of developed nations + China, for nearly all vehicles. It will take a long time for that to change, given that the cost of alternatives and reliability of the electric grid are prohibitive to those industries and countries that are currently reliant on O&G. Given that many developing countries are only started to enter the hockey stick/S curve for demand, they could easily supplant demand that is reduced in developed nations and China. I think most market participants confuse cyclical shifts with secular trends.

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Yes, transportation is just one part of the equation. And as I mentioned before, look at the average age of cars on the road or over 10 years in both the U.S. and Europe. What does that tell you?

 

It simply means that the average folk in the richest countries cannot afford a brand new car or will keep it for a very long time. So to put EV's on the road you need sales of new cars.

 

Taking the U.S., or a very large consumer, out of the 17+ million units sold each year, the richer folks need to go out and buy a large percentage of EV's to replace the park of 260 million vehicles in any meaningful way.

 

And what is selling right now? Pickup trucks and large vehicles!

 

http://www.wsj.com/mdc/public/page/2_3022-autosales.html

 

Then what about the massive infrastructure bill in the U.S.? This represents a large amount spent in energy to make steel and concrete. Energy to dig and lay the infrastructure. Then a significant amount of asphalt. All of this comes mostly from fossil fuels.

 

Of course, I am not intelligent enough to know what a tipping point is? Although, I have been told by smarter people than I am that the trend is your friend. So I will keep me eyes closed and wait for the supply crunch which some very smart people using a lot of data are thinking is coming in about 2 years max.

 

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Instead of coming up with a bunch "if's" why don't you read the reports on future demand from various organizations that have actually crunched the data and took into account the impact of renewables, population growth, increased efficiency ,etc.?

 

Then once you have done that and found a big hole in their analysis, then come lecture us.

 

The main reason I don't spend a year researching a topic before posting an open-ended question to a message board is because it's a terrible use of my time.  I thought the point of the General Discussions message board was to discuss things and try to learn from others' opinions.

 

I imagine that you'll probably have to scold me soundly for my curiosity in the future as well, since I'm much more interested in learning from random people on the internet about things I'm not an expert in, than the things I am.

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The guys I know say they've made some tremendous/incredible progress...they are getting maybe 90% of the way there...HOWEVER, the real problem is the unexpected/odd condition on the roads.  Humans can adapt to this VERY easily, but the driving systems have terrible problems with this.  Nobody is going to ride in a car that is 90% safe...Nobody is going to ride in a car that is 99% safe....What about 99.9%  Or 99.95% safe?  Hard to make that judgement.  Getting that final few percentages of safety may prove to be a very difficult thing indeed!  It may take 10X more engineering skill & $$$ to go from 98% safe to 99% safe.

 

Hmm, this is a really good point, DTEJD1997.  It makes sense to me that autonomous driving may be a 90/10 thing like so many things in software engineering.  Thanks for this--it's certainly changed my mental model of how this change will occur.

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It simply means that the average folk in the richest countries cannot afford a brand new car or will keep it for a very long time. So to put EV's on the road you need sales of new cars.

 

Taking the U.S., or a very large consumer, out of the 17+ million units sold each year, the richer folks need to go out and buy a large percentage of EV's to replace the park of 260 million vehicles in any meaningful way.

 

And what is selling right now? Pickup trucks and large vehicles!

 

http://www.wsj.com/mdc/public/page/2_3022-autosales.html

 

Then what about the massive infrastructure bill in the U.S.? This represents a large amount spent in energy to make steel and concrete. Energy to dig and lay the infrastructure. Then a significant amount of asphalt. All of this comes mostly from fossil fuels.

 

Of course, I am not intelligent enough to know what a tipping point is? Although, I have been told by smarter people than I am that the trend is your friend. So I will keep me eyes closed and wait for the supply crunch which some very smart people using a lot of data are thinking is coming in about 2 years max.

 

This is by far your best post on this topic. Thanks for that. That cars vs trucks chart is particularly insightful--I never would have guessed that.

 

I think maybe you still don't understand the concept of a tipping point not because of a lack of intelligence, but rather because of the arguments you're making.  For instance, you seem to believe that only rich people will go for EV, whereas I think the tipping point will come when the cost of EV is lower than ICE.  It could be that EV will have a problem in some areas where being environmentally unfriendly is a point of pride, but I feel like when the economies of scale kick in so EV becomes the obviously cheaper option, the world will change pretty fast. 

 

USA might be one of the last converts because gas is relatively cheap, but I think it will tip when the economics make sense.  Based on your numbers, to get a 5% drop in gasoline use from transportation in 2 years, you need about 3/4 of people in a given year to go EV--not an unrealistic ask if the economics hits a tipping point, particularly since dual car families with ICE and EV will likely favor EV for most trips because of the lower operating cost.  (And remember, I'm not hypothesizing that the entire drop in energy usage will come from EV, but rather the focus on anti-carbon technology solutions.  That the math seems to imply that when we hit the EV tipping point in the USA, a 5% reduction in oil usage in two years could come just from EV is pretty surprising to me. )

 

That said, maybe you're right and the economies of scale for EV are still years away.  I'm not sure--it's really hard to distinguish between hype and realism, and everyone seems to have an agenda.

 

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The guys I know say they've made some tremendous/incredible progress...they are getting maybe 90% of the way there...HOWEVER, the real problem is the unexpected/odd condition on the roads.  Humans can adapt to this VERY easily, but the driving systems have terrible problems with this.  Nobody is going to ride in a car that is 90% safe...Nobody is going to ride in a car that is 99% safe....What about 99.9%  Or 99.95% safe?  Hard to make that judgement.  Getting that final few percentages of safety may prove to be a very difficult thing indeed!  It may take 10X more engineering skill & $$$ to go from 98% safe to 99% safe.

 

Hmm, this is a really good point, DTEJD1997.  It makes sense to me that autonomous driving may be a 90/10 thing like so many things in software engineering.  Thanks for this--it's certainly changed my mental model of how this change will occur.

RichardGibbons:

 

It is good to have reasonable discussion with people of different viewpoints.  I am pretty confident in most of my beliefs/assumptions...but not 100%.  I am certainly willing to reconsider if I see/hear compelling evidence to the contrary.

 

I suspect that we will see the BEGINNING of the tipping point once we get self driving trucks (or other vehicles) in protected or sheltered environments, most likely to be limited access turnpikes.  Those roads are in very good condition, have more uniform traffic, no pedestrians, long straight shots, etc.  A prime example of this I think is the Ohio Turnpike.  It runs from Indiana to Pennsylvania, East to West.  In most areas there is a entrance/exit every 15 miles or so.  The road is almost always straight...This would be a perfect place for self driving trucks. 

 

I think once it becomes common in environments like that, it will start to spread out.

 

Where I am at (Metro Detroit), the driving conditions can be quite crazy to say the least.  One example of this is that in the inner city, late at night, people sometimes will not fully stop at stop signs NOR do they always stop at red lights...I think this is mainly a safety issue.  You can't be carjacked if you are moving.

 

Another crazy example is driving speed on some of the freeways.  On I=94, on the East side of the city, later at night (11 PM or later, ESPECIALLY on the weekends) traffic will move at an unbelievably fast pace.  I refuse to drive faster than 80MPH in my current vehicle in a 55 MPH zone.  I'm just not going to do it!  HOWEVER, I am frequently one of the slower drivers on the road.  I am regularly passed by vehicles traveling at speeds of even 100MPH+  This is incredibly dangerous, as this part of the freeway is VERY old and was never designed for traffic of this speed.  The sight lines are sometimes short, and a vehicle moving at 100mph+ can come up on you VERY quickly.

 

Conversely, sometimes there are vehicles moving at relatively slow speeds (40 mph?).  Perhaps these drivers are stoned or drunk...they may also be experiencing engine problems?  I've also seen vehicles traveling down the freeway with only 3 tires!!!!!  The wheel without a tire will be shooting sparks out 4-5 feet...and the car is going about 30 MPH and wobbling back & forth.  3 wheeled vehicles are not a common occurrence, but they are there from time to time. 

 

Then of course you've got the cars with different sized tires, with the driver wildly fighting to keep the car in only one lane of traffic.

 

There are also lots of vehicle breakdowns and vehicles abandoned on the side of the road.

 

Then you've got people walking on the shoulder of the road and people crossing the freeway.

 

Unfortunately, there are also lots of crashes & wrecks....lots of debris in the road...lots of potholes & such.

 

So this is a VERY different driving experience than the Ohio Turnpike!  A self driving car on I-94 in Detroit is going to have to "bring it's A game"!

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